Covered Bonds

Chinese and French banks may take advantage of a new Luxembourg green covered bond law, where the cover assets are linked to renewable energy, according to an official at the Luxembourg Stock Exchange (LuxSE).

As the EU Covered Bonds Directive nears the finish line, speakers at the Covered Bonds Market conference held by the Association for Financial Markets in Europe (Afme) and the Association of German Pfandbrief Banks (VDP) have voiced concern about the quality of the product being diluted.

Aareal Bank this week returned to the euro Pfandbrief market for the fourth time this year to issue a four year deal, which was priced at its widest spread in four years. The fact Aareal chose to pre-fund suggests that spreads may have further to go.

National Australia Bank (NAB) was looking for execution certainty when heading to the dollar market to sell a pair of senior unsecured and covered bonds on Monday. But with credit conditions improving on Tuesday, Westpac shaved a few basis points off the cost of funding compared with its peer by opting for euros in covered and senior formats.

The secondary market for covered bonds remains weak and, according to one trader, conditions are “not far from disorderly”. All jurisdictions and tenors are under pressure as borrowers have “no incentive to defer planned new issues”, said analysts at DZ Bank.

The French government has taken further steps to rationalise its various public sector lending institutions with the transfer of a controlling stake of SFIL to Caisse des Dépôts et Consignation (CDC), a move that should theoretically help lower public spending.

With covered bond spreads likely to go wider, ANZ’s decision to take as much size from the market as possible was logical. The short and rare four year tenor was instrumental in boosting appeal for the bond issue, but it also helped that the issuer took the trouble to engage with investors with a roadshow beforehand.

At the latest monetary policy meeting of the European Central Bank, governing council members mentioned the looming end of the targeted longer-term refinancing operations (TLTRO II). But experts reckon that the life of this cheap liquidity programme could be extended, and that it may even be used to help stem a financial crisis in Italy.

The European Parliamentary Committee on Economic and Monetary Affairs (ECON) voted on its version of the covered bond directive on Tuesday, with the European Council yet to agree its text. But a leaked draft of the Council’s 'overall compromise text', seen by GlobalCapital, suggests the two sides are getting closer together.

Société Générale followed BPCE into the covered bond market on Tuesday, also taking the opportunity to pre-fund ahead of what many market participants expect to be a busy start to 2019.

HSBC Canada opened books on Tuesday for its first covered bond and followed in the same three year maturity, and with the same starting spread, as DBS Bank's issue on Monday. But, after several hours, when the spread was fixed at the initial level, lead managers failed to update investors on the order book size, leading some to question how well the deal was going.

DBS Bank attracted a strong order book for its $1.25bn three year covered bond, the largest ever issued by an Asian bank.